Describe Your Perfect Life Insurance Product

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TrollToll
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Describe Your Perfect Life Insurance Product

Post by TrollToll » Thu Oct 03, 2019 9:25 am

Life insurance actuary and Boglehead here. I'm interested in what this forum thinks the perfect life insurance product is. With any luck, I can get Megacorp to sell this product.

Here are my thoughts based on comments I've seen on this site:
-Decreasing death benefit (from $X to $X*0.5) over 20/25/30 year term
-Decreasing premiums (from $Y to $Y*0.5) over same 20/25/30 year term (we may not be able to offer level premiums due to reserving regulations)
-Direct-to-consumer sale via website

Pros:
-Better fit: Bogleheads get decreasing insurance as their insurance needs decrease
-Better rates: Insurance coverage gets more expensive as insureds age, so decreasing insurance will reduce expensive unneeded insurance in later years
-Better rates: No need to buy 2 products, which reduces allocated overhead costs
-Better rates & sales experience: Direct-to-consumer sale means we may be able to save money on commissions & offer sales experience that isn't too pushy

Cons:
???

12thKnight
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Re: Describe Your Perfect Life Insurance Product

Post by 12thKnight » Thu Oct 03, 2019 10:38 am

There is no 'perfect' life insurance product, not even for the Boglehead subset of the population. The use of the word 'perfect' is salesy and more than a bit dangerous.

The product you're describing is probably most suited to pure mortgage protection. Not everyone is solely trying to cover their mortgage, although some are, and decreasing DB products (although somewhat uncommon in the marketplace) have been a thing for decades. More commonly, a prospective insured will have multiple life insurance needs such as income protection, college funding and/or the desire to create an estate, all of which would not favor a decreasing death benefit.

I wish you well with your product, but I'm not sure it would be anything too different from what's already out there.

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simplesimon
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Re: Describe Your Perfect Life Insurance Product

Post by simplesimon » Thu Oct 03, 2019 11:39 am

Many here achieve similar to what you propose by laddering their policies. Would one policy that steps down save a significant amount of money? How else would this differ other than having one policy vs multiple?

Is direct to consumer legal?

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djpeteski
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Re: Describe Your Perfect Life Insurance Product

Post by djpeteski » Thu Oct 03, 2019 12:09 pm

While I appreciate your desire to help the community, the perfect life insurance product is X year level term. I would recommend some stacking of a few policies in some situations, but level term is perfect. Something like a 15 year, 20 year, and 30 year policy.

In my own case, I probably needed a 10 year level term, but opted on the 15 year to be conservative a few years back. The house is paid off, almost all the kids are done with school, and we are close to having enough assets to retire.

I would not want too much of decreasing benefit amount as costs, and therefore need, rise over time. It could lead to insufficient coverage. Plus the cost savings is just not that much. I pay 800/year for 500K, so .62/thousand. Lets say I would want to keep it level for 8 years, then linearly decrease to 250 by year 15. I'd be saving $35 per year or so. Its just not that much. If my wife is willing to put up with me that long she deserves the extra $$$ that the death benefit provides.

Its a shame that most agents cannot make a living selling term life insurance, but that is exactly what makes whole life such a bad deal.

dknightd
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Re: Describe Your Perfect Life Insurance Product

Post by dknightd » Thu Oct 03, 2019 12:16 pm

TrollToll wrote:
Thu Oct 03, 2019 9:25 am
Life insurance actuary and Boglehead here. I'm interested in what this forum thinks the perfect life insurance product is. With any luck, I can get Megacorp to sell this product.

Here are my thoughts based on comments I've seen on this site:
-Decreasing death benefit (from $X to $X*0.5) over 20/25/30 year term
-Decreasing premiums (from $Y to $Y*0.5) over same 20/25/30 year term (we may not be able to offer level premiums due to reserving regulations)
-Direct-to-consumer sale via website

Pros:
-Better fit: Bogleheads get decreasing insurance as their insurance needs decrease
-Better rates: Insurance coverage gets more expensive as insureds age, so decreasing insurance will reduce expensive unneeded insurance in later years
-Better rates: No need to buy 2 products, which reduces allocated overhead costs
-Better rates & sales experience: Direct-to-consumer sale means we may be able to save money on commissions & offer sales experience that isn't too pushy

Cons:
???
I bought a simple term policy when somebody else depended on my income. I increased my coverage when we started having kids. Now that I have no income, I'm looking at the other end. Enough income for ever. So now I bought an SPIA. This is the one insurance product I actually might like to use. I'm guessing you are referring to a "whole life" policy. I'm glad I never bought one of those. But I'm sure that some people are happy they had one.
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds.

petulant
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Re: Describe Your Perfect Life Insurance Product

Post by petulant » Thu Oct 03, 2019 12:21 pm

Another vote for level term.

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TrollToll
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Re: Describe Your Perfect Life Insurance Product

Post by TrollToll » Thu Oct 03, 2019 1:03 pm

simplesimon wrote:
Thu Oct 03, 2019 11:39 am
Many here achieve similar to what you propose by laddering their policies. Would one policy that steps down save a significant amount of money? How else would this differ other than having one policy vs multiple?

Is direct to consumer legal?
We assume underwriting costs us $200-300 per policy or so. If you buy 2-3 policies vs just 1, we assume you get underwritten 2-3 times, even though you actually don't (we don't give policyholders a discount for this). Combining the policies into 1 would allow us to decrease rates, but I can't say by how much without doing some work.

Otherwise, a linearly decreasing term product would be more gradual. I could see the moment your laddered coverage cuts in half as being jarring for some people. I admit this is not a huge change overall, though.

Direct to consumer is legal - the industry is just way behind the times and a bit entrenched. Check out havenlife.com (I'm not affiliated)
While I appreciate your desire to help the community, the perfect life insurance product is X year level term. I would recommend some stacking of a few policies in some situations, but level term is perfect. Something like a 15 year, 20 year, and 30 year policy.

In my own case, I probably needed a 10 year level term, but opted on the 15 year to be conservative a few years back. The house is paid off, almost all the kids are done with school, and we are close to having enough assets to retire.

I would not want too much of decreasing benefit amount as costs, and therefore need, rise over time. It could lead to insufficient coverage. Plus the cost savings is just not that much. I pay 800/year for 500K, so .62/thousand. Lets say I would want to keep it level for 8 years, then linearly decrease to 250 by year 15. I'd be saving $35 per year or so. Its just not that much. If my wife is willing to put up with me that long she deserves the extra $$$ that the death benefit provides.

Its a shame that most agents cannot make a living selling term life insurance, but that is exactly what makes whole life such a bad deal.
My idea is to replace stacking multiple policies with just one policy to increase efficiency and simplicity and reduce cost.

Also, I generally think need for life insurance decreases over time. As kids become adults and no longer depend on your income. As your retirement account grow so you and your spouse depend less on your income.

Similar to Edward Jones advisers, I don't feel bad for life issuance agents.

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simplesimon
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Re: Describe Your Perfect Life Insurance Product

Post by simplesimon » Thu Oct 03, 2019 1:17 pm

TrollToll wrote:
Thu Oct 03, 2019 1:03 pm

Otherwise, a linearly decreasing term product would be more gradual. I could see the moment your laddered coverage cuts in half as being jarring for some people. I admit this is not a huge change overall, though.
Isn't this what you proposed in your OP? -Decreasing death benefit (from $X to $X*0.5) over 20/25/30 year term

Admiral
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Re: Describe Your Perfect Life Insurance Product

Post by Admiral » Thu Oct 03, 2019 1:27 pm

One that never pays out on me or my spouse. Perfect.
:sharebeer

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greg24
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Re: Describe Your Perfect Life Insurance Product

Post by greg24 » Thu Oct 03, 2019 1:33 pm

20 year level term.

dknightd
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Re: Describe Your Perfect Life Insurance Product

Post by dknightd » Thu Oct 03, 2019 2:44 pm

TrollToll wrote:
Thu Oct 03, 2019 1:03 pm

My idea is to replace stacking multiple policies with just one policy to increase efficiency and simplicity and reduce cost.

Also, I generally think need for life insurance decreases over time. As kids become adults and no longer depend on your income. As your retirement account grow so you and your spouse depend less on your income.

Similar to Edward Jones advisers, I don't feel bad for life issuance agents.
Hi TrollToll,
Design a product you would sell to yourself. And be happy buying.
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds.

bberris
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Re: Describe Your Perfect Life Insurance Product

Post by bberris » Thu Oct 03, 2019 2:55 pm

There's near universal hate for whole life here, understandably. At the same time, BH loves level-term (as opposed to increasing premium term or decreasing benefit term). Ironically, level-term has a whole-life aspect to it. You pay an extra premium when you are young and get a bargain when you are old near the end of the term. That is simply what it takes to have a level premium. I've looked at cancelling level term in the last five years, only to find that the expected return is 2 or 3 times the premium. Even better for the insurance company, many policies are cancelled in the final years, when the insurance company is actuarially losing.

dknightd
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Re: Describe Your Perfect Life Insurance Product

Post by dknightd » Thu Oct 03, 2019 3:13 pm

bberris wrote:
Thu Oct 03, 2019 2:55 pm
Ironically, level-term has a whole-life aspect to it. You pay an extra premium when you are young and get a bargain when you are old near the end of the term. That is simply what it takes to have a level premium. I've looked at cancelling level term in the last five years, only to find that the expected return is 2 or 3 times the premium. Even better for the insurance company, many policies are cancelled in the final years, when the insurance company is actuarially losing.
Interesting interpretation.
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds.

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neurosphere
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Re: Describe Your Perfect Life Insurance Product

Post by neurosphere » Thu Oct 03, 2019 3:27 pm

TrollToll wrote:
Thu Oct 03, 2019 9:25 am
-Decreasing death benefit (from $X to $X*0.5) over 20/25/30 year term
-Decreasing premiums (from $Y to $Y*0.5) over same 20/25/30 year term (we may not be able to offer level premiums due to reserving regulations)
What about a benefit and premium which scales with inflation? That is, the rate of decrease for each is not set in advance, but rather tied to purchasing power in some way.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

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nisiprius
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Re: Describe Your Perfect Life Insurance Product

Post by nisiprius » Thu Oct 03, 2019 3:48 pm

The perfect life insurance product is one that is a decent fit to my actual needs, that is so simple that I can understand it, and that is a commoditized offering, available from many insurers with essentially identical structure, terms and conditions, so that I can do trivial comparisons apples-to-apples between insurers.

The fewer differentiating "features" it has, the better.

(Since it's now been a while since I needed life insurance, I can't speak to what the works out to. I had five-year renewable term. Apparently five-year term is rare nowadays. I can't speak to the tradeoff between longer and shorter terms.)
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MrBeaver
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Re: Describe Your Perfect Life Insurance Product

Post by MrBeaver » Thu Oct 03, 2019 4:02 pm

TrollToll wrote:
Thu Oct 03, 2019 1:03 pm
My idea is to replace stacking multiple policies with just one policy to increase efficiency and simplicity and reduce cost.

Also, I generally think need for life insurance decreases over time. As kids become adults and no longer depend on your income. As your retirement account grow so you and your spouse depend less on your income.

Similar to Edward Jones advisers, I don't feel bad for life issuance agents.
I for one, would absolutely love this product. The devil however, is in the details of how the benefit decreases over time. When I crunched my (predicted) numbers, inflation + back-loaded college costs + portfolio growth yielded an ideal decreasing curve that was definitely not linear - maybe 75% at 75% of the term (vs 25 if linear) and then rapidly decreasing from there once proposed college runs out. But reality will run afoul of predictions, so having something flexible that I could control how much to decrease the benefit each year would be ideal.

Here is a potential competitor that talks about being flexible for reducing the coverage amount without cancelling the policy, for instance:
https://www.ladderlife.com

I have no idea whether their pricing is competitive or whether they end up charging more than a similar level term policy would cost. Ideally (for the consumer) this type of flexible policy would be equal in cost to a level term policy and operate with the option of not decreasing the benefit. But if life goes well and you don't need that much benefit, you could reduce the benefit and premium amount later without having to re-apply for new insurance and underwriting of a new (lower benefit) policy.

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Stinky
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Re: Describe Your Perfect Life Insurance Product

Post by Stinky » Thu Oct 03, 2019 4:49 pm

dknightd wrote:
Thu Oct 03, 2019 3:13 pm
bberris wrote:
Thu Oct 03, 2019 2:55 pm
Ironically, level-term has a whole-life aspect to it. You pay an extra premium when you are young and get a bargain when you are old near the end of the term. That is simply what it takes to have a level premium. I've looked at cancelling level term in the last five years, only to find that the expected return is 2 or 3 times the premium. Even better for the insurance company, many policies are cancelled in the final years, when the insurance company is actuarially losing.
Interesting interpretation.
And correct interpretation.

The policyholder “overpays” in the early years on any policy with level premiums. The “overpayment” is the smallest on short-term policies like 10 year term, where it is barely noticeable. It grows as the policy term lengthens, reaching a peak in the dreaded “whole life” policies.
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ivk5
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Re: Describe Your Perfect Life Insurance Product

Post by ivk5 » Thu Oct 03, 2019 6:39 pm

neurosphere wrote:
Thu Oct 03, 2019 3:27 pm
TrollToll wrote:
Thu Oct 03, 2019 9:25 am
-Decreasing death benefit (from $X to $X*0.5) over 20/25/30 year term
-Decreasing premiums (from $Y to $Y*0.5) over same 20/25/30 year term (we may not be able to offer level premiums due to reserving regulations)
What about a benefit and premium which scales with inflation? That is, the rate of decrease for each is not set in advance, but rather tied to purchasing power in some way.
Similar to what I was thinking. Declining benefit can be approximated by laddering as noted above (and some level term policies allow benefit reduction while in force). But lack of inflation indexing of benefit is a much bigger problem IMHO, that causes many people to over- or under- buy relative to need. Put another way, level term is a reasonable vehicle for insuring future earnings but a crazy way to buy inflation protection.

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Stinky
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Re: Describe Your Perfect Life Insurance Product

Post by Stinky » Fri Oct 04, 2019 10:26 am

Former life insurance person here.

I think that the level premium, level term policy is absolutely excellent. It does a great job of delivering maximum insurance coverage at minimum cost. It’s easily understood by consumers. It lends itself to comparison across companies, and can be easily sold on a direct basis.

Level term is superior to the product that preceded it, which was annually increasing premium term insurance. This product was widely sold in the 1980s. It ultimately collapsed because the “healthy” individuals were invented to buy a new policy every few years using select underwriting, while those who kept the old policies saw premium rates rise faster than the mortality curve because the healthy lives kept lapsing.

The challenge for life insurers going forward is to make level term underwriting quicker and less intrusive. Consumers expect “quick results” from their financial service firms, and anything life insurers can do to make the buying process faster will be good for consumers.
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Re: Describe Your Perfect Life Insurance Product

Post by bsteiner » Fri Oct 04, 2019 10:53 am

The old style annual or 5-year renewable term so you don’t have to guess in advance how long you’ll need how much insurance.

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